FY 2020-21 and FY 2021-22 Revenue Letter Controller's Discussion of the Mayor's Proposed Budget

 
FY 2020-21 and FY 2021-22
Revenue Letter

Controller’s Discussion of the
Mayor’s Proposed Budget

The Charter requires that the Controller comment on revenue estimates assumed in
the Mayor’s FY 2020-21 and FY 2021-22 proposed budget. We find tax revenue
assumptions to be reasonable, but caution they are highly dependent on the course
of economic reopening, will require frequent monitoring, and are subject to updates
as conditions change. The budget draws heavily on prior year reserves to support
operations. Baselines are largely funded at or above required levels.

                                                                                      August 11, 2020

                                                                          City & County Of San Francisco
                                                                                  Office of the Controller
                                                                               Budget & Analysis Division
2 | FY 2020-21 and FY 2021-22 Revenue Letter

   About the Budget & Analysis Division
   The Budget and Analysis Division (BAD) manages the technical development of the City’s annual
   budget, including forecasting tax revenues, costing and budgeting labor and benefit costs, and
   assisting the Mayor and Board of Supervisors with costing and budgeting of policy initiatives.
   The group manages the City’s adherence to voter-approved spending requirements and
   financial policies and produces a variety of reports, including quarterly budget status updates
   and various fee-related reports. Additionally, the division manages property tax apportionment,
   rate setting, and reporting to the state, places special assessments on property tax bills, and
   processes the Assessor’s changes to prior and current year property tax rolls.

   Budget & Analysis Team:
   Michelle Allersma, Director of Budget & Analysis, michelle.allersma@sfgov.org
   Ysabel Catapang, Budget and Revenue Analyst, ysabel.catapang@sfgov.org
   Mark Chen, Budget and Revenue Analyst, mark.chen@sfgov.org
   Edward de Asis, Assistant Citywide Budget Manager, edward.deasis@sfgov.org
   Nicholas Leo, Budget and Revenue Analyst, nicholas.leo@sfgov.org
   Carol Lu, Citywide Revenue Manager, carol.lu@sfgov.org
   David Ly, Property Tax Analyst, david.ly@sfgov.org
   Mendy Ma, Budget and Revenue Analyst, mendy.ma@sfgov.org
   Michael Mitton, Budget and Revenue Analyst, michael.mitton@sfgov.org
   Risa Sandler, Citywide Budget Manager, risa.sandler@sfgov.org
   Jamie Whitaker, Property Tax Manager, james.whitaker@sfgov.org

   For more information, please contact:               Or visit:

   Michelle Allersma                                   http://www.sfcontroller.org
   Office of the Controller
   City and County of San Francisco
   (415) 554-4792 | michelle.allersma@sfgov.org
3 | FY 2020-21 and FY 2021-22 Revenue Letter

Executive Summary
Key findings from our review of the proposed two-year budget:

      Tax revenue assumptions are reasonable and based on the expectation that the COVID-19
       pandemic continues to depress economic activity in FY 2020-21. Economic and revenue
       projections are highly uncertain given the unknown future course of the public health crisis.
       Following a severe loss of tax revenues in the final quarter of FY 2019-20, revenue estimates in
       the proposed budget assume a slow recovery begins in FY 2020-21. The budget assumes the
       impact of the public health crisis is significantly mitigated by the end of FY 2020-21 and a more
       robust growth begins by that time, as restrictions on large gatherings are lifted and office, hotel
       and other commercial activities can begin to return to pre-COVID levels. Tax revenues will fall
       short of these projections if the public health crisis persists at current levels or worsens. The
       Controller’s Office will closely monitor and report on revenues during the upcoming fiscal year,
       and active management of the City’s budget will likely be required by the Mayor and Board of
       Supervisors.

      The budget assumes continued federal funding for a significant portion of COVID-19 response
       costs in FY 2020-21. The budget relies on significant federal funding for COVID response efforts,
       including $236.4 million of reimbursements from the Federal Emergency Management Agency
       (FEMA) and $82.1 million from the Coronavirus Relief Fund. This assumes that FEMA permits
       claiming through FY 2020-21 and for existing eligible costs. Additionally, the budget assumes no
       public health response costs or associated revenues following FY 2020-21. To the extent these
       local programs are required after FY 2020-21, future budgets will require significant adjustment.
       Lastly, Congress is currently negotiating the next federal stimulus package, which could provide
       increased local resources not assumed in the budget.

      The budget assumes voter approval of a November 2020 ballot measure to increase the gross
       receipts tax on certain taxpayers and impose new replacement general taxes on the gross
       receipts from the lease of certain commercial space or larger businesses if two contested 2018
       (June and November Prop C) business tax measures are struck down. As a result, $330.8 million
       of new revenue transfers into the General Fund are assumed in the budget, to repay prior year
       General Fund advances made for these purposes. Should the measure fail, this would result in
       the loss of a significant General Fund balancing solution.

      The proposed budget appropriates “excess ERAF” property tax funds in FY 2020-21 and FY
       2021-22 for ongoing purposes. Given the risk of state legislation to eliminate excess ERAF,
       through FY 2019-20 these revenues have been treated as non-recurring and largely spent on
       one-time uses. While future revenues will depend on the final contents of ERAF calculation and
       allocation procedures established by the State Controller’s Office in December 2020, as
       stipulated in state budget trailer legislation, excess ERAF revenue was not eliminated wholesale.
       The proposed budget includes $330.0 million of excess ERAF revenue. Of the $252.1 million
       available after baseline allocations, $53.9 million is spent to continue education, mental health
       and homeless services previously funded on a temporary basis and $198.3 million was used to
4 | FY 2020-21 and FY 2021-22 Revenue Letter

       balance other revenue shortfalls. Excess ERAF revenues assumed in FY 2021-22 are subject to
       some legislative risk as the State grapples with likely budget shortfalls in future fiscal years.

      The budget assumes that contractual wage increases for all City employees are renegotiated
       and deferred. Under the terms of previously negotiated labor contracts, city employees are
       currently scheduled to receive pay increases in both FY 2020-21 and FY 2021-22 at a General
       Fund cost of approximately $55.0 million and $215.0 million, respectively. To the extent that
       these negotiations are not successful, costs will be higher in each of the budget years, requiring
       additional adjustments to maintain a balanced budget.

      The budget consolidates several reserves into a new single reserve to guard against these
       significant risks. The budget consolidates seven existing one-time reserves into one COVID
       Response and Economic Loss Reserve of $507.4 million. This reserve would be available to
       offset losses versus the proposed budget for risks noted above, or to assist with balancing of
       future fiscal year budgets. We note that this balance would be sufficient to offset some – but
       not all – of these risks should they materialize during the budget period.

      The budget withdraws the maximum permissible amount from the City’s economic stabilization
       reserves; code-mandated reserves are funded and maintained at required levels. Over the two
       budget years, the budget draws $167.3 million of Budget Stabilization Reserve and $171.8
       million of Rainy Day Reserve, the maximum amounts allowed under the City’s financial policies.
       A balance of $182.6 million remains in those reserves, and per the City’s financial policies, can
       be fully drawn in FY 2022-23. General Reserve funding levels in the budget are at code-
       mandated levels, which are reduced in years when the City is eligible to withdraw from its
       economic stabilization reserves, resulting in savings of approximately $28.9 million in FY 2020-
       21.

      The proposed budget is in violation of the City’s non-recurring revenue policy. In order to
       adopt the budget, the Board of Supervisors will need to temporarily suspend the City’s financial
       policies. Charter Section 9.120 requires the Board of Supervisors to adopt financial policies, and
       to suspend these policies by a two-third’s vote in any year in which it seeks to approve a
       budget that the Controller determines is inconsistent with these policies. The Board of
       Supervisors has adopted a nonrecurring revenue policy, codified in Administrative Code Section
       10.61, which requires selected nonrecurring revenues to be used only for nonrecurring
       expenditures. The FY 2021-22 budget relies on $331.6 million of one-time reserves and only
       $88.6 million of one-time expenditures. The Controller’s Office has advised the Mayor’s Budget
       Office of the need to propose a resolution to suspend the financial policies in FY 2021-22.

      Most voter-adopted spending requirements are met, or exceeded, at a cost exceeding $1.3
       billion annually. The financial baselines include mandated spending for transit, libraries, schools,
       early childhood education, street trees, and other programs. Several programs are funded
       above the required levels, including the Children’s Services baseline, Transitional Aged Youth
       baseline, Recreation and Parks baseline, as well as two new baselines that had not been
       previously measured: the Early Care and Education Baseline (June 2018 Prop C) and the Our
       City, Our Home Baseline (November 2018 Prop C). The Police staffing baseline is likely not met.
5 | FY 2020-21 and FY 2021-22 Revenue Letter

APPENDICES
   1.   General Fund Sources
   2.   General Fund Reserve Uses and Deposits
   3.   One-Time Sources and Nonrecurring Revenue Policy Compliance
   4.   Baselines & Mandated Funding Requirements
6 | FY 2020-21 and FY 2021-22 Revenue Letter

Appendix 1. General Fund Sources
As shown in Exhibit 1, the Mayor’s proposed budget for FY 2020-21 includes $6.2 billion in General Fund
sources and $13.7 billion in all funds sources, representing increases of 0.9 percent and 11.1 percent,
respectively, from the FY 2019-20 original budget. The Mayor’s proposed budget for FY 2021-22
includes $5.8 billion in General Fund sources and $12.6 billion in all funds sources representing
decreases from the FY 2020-21 proposed budget of 6.2 percent and 7.9 percent, respectively.

                                Exhibit 1. Overview of Budget Sources ($ million)

              General Fund
                                                                     FY 2019-20              FY 2020-21       FY 2021-22
                                                                       Budget                 Proposed         Proposed
                Fund Balance                                     $            210.6 $              361.2 $             9.8
                Use of Reserves                                                89.2                156.5             331.6
                Regular Revenues                                           5,679.6                5,231.6          5,290.2
                Transfers In to the General Fund                              163.5                447.1             182.5
              Total GF Sources                                   $         6,142.9 $              6,196.3 $        5,814.0
              Change from Prior Year                                                     $          53.5 $          (382.3)
              Percentage Change                                                                     0.9%            -6.2%

              All Funds
                                                                   FY 2019-20     FY 2020-21     FY 2021-22
                                                                     Budget        Proposed       Proposed
                Fund Balance                                     $        407.1 $        819.8 $         137.6
                Use of Reserves                                            95.3          178.7          358.9
                Regular Revenues                                        11,811.3      12,683.9        12,108.8
              Total All-Funds Sources                            $        12,313.7 $            13,682.4 $        12,605.3
              Change from Prior Year                                                     $        1,368.7 $       (1,077.1)
              Percentage Change                                                                    11.1%            -7.9%

              Note: Totals may appear to differ from sum of line items due to rounding

Exhibit 1-1 provides a summary of the General Fund sources in the Mayor’s FY 2020-21 and FY 2021-22
proposed budget.
7 | FY 2020-21 and FY 2021-22 Revenue Letter

                                Exhibit 1-1. General Fund Sources ($ millions)
                                                        FY 2019-20       FY 2020-21       FY 2021-22
  Sources of Funds                                       Budget          Proposed         Proposed       Notes
  Fund Balance and Reserves
  Prior Year Fund Balance - Operating Surplus       $         210.6 $          361.2 $            9.8      1
  Use of Reserves                                              89.2            156.5            331.6     2
                                         Subtotal             299.9            517.7            341.4
  Regular Revenues
  Property Taxes                                             1,956.0          2,019.6          1,976.9    3
  Business Taxes                                             1,050.6           831.4           1,030.9    4
  Sales Tax (Bradley Burns 1%)                                204.1            183.7            185.3     5
  Hotel Room Tax                                              389.1            126.2            233.0     6
  Utility Users Tax                                            98.7              81.1            89.0      7
  Parking Tax                                                  83.0             59.4             84.6     8
  Real Property Transfer Tax                                  296.1            138.0            253.4     9
  Stadium Admissions Tax                                          5.5            2.5              4.4     10
  Cannabis Tax                                                    3.0            4.3              8.5     11
  Sugar Sweetened Beverage Tax                                  16.0             14.0             14.0    12
  Access Line Tax                                              48.9             48.9             52.0     13
  Licenses, Permits & Franchises                               30.4             23.2             23.7
  Fines and Forfeitures                                            3.1           2.3               3.1
  Interest & Investment Income                                 76.6             23.5              16.5    14
  Rents & Concessions                                             15.1           10.9             15.5
  Intergovernmental - Federal                                 280.0            615.9            293.6     15
   Federal Emergency Management Agency                            -            236.4              -
   Coronavirus Relief Fund                                        -              82.1             -
   Other                                                      280.0            297.4            293.6
  Intergovernmental - State                                   805.9            761.3            733.0
   Public Safety Sales Tax                                    104.6              97.1           103.6     16
   1991 Health & Welfare Realignment                          221.0             190.1           197.0     17
   Public Safety Realignment                                    42.1             36.1            33.2     18
   State Realignment Backfill                                     -             22.2              -      17,18
   Other                                                      438.1            415.8            399.2     19
  Intergovernmental Revenues - Other                              2.7            2.9              2.9
  Charges for Services                                        232.3            235.5            223.8
  Recovery of General Government Costs                         12.9             21.8             21.8
  Other Revenues                                               69.4             25.3             24.3     20
                         Subtotal Regular Revenues $        5,679.6           5,231.6 $       5,290.2

  Transfers In to the General Fund                            163.5            447.1            182.5     21
  Total Sources                                     $       6,142.9 $        6,196.3 $        5,814.0
8 | FY 2020-21 and FY 2021-22 Revenue Letter

NOTES
1. Prior Year Fund Balance
The proposed budget assumes $370.9 million in unassigned General Fund surplus will be available at
the end of FY 2019-20. In May 2020, the Controller’s Nine Month Report projected a mid-year shortfall
of $246.2 million. After implementing the Mayor’s rebalancing plan, which reduced expenditure
budgets and used $77.6 million of the General Reserve, fund balance available for budget years was
$331.6 million, as previously assumed in the January 2020 Five Year Financial Plan update. After the
publication of the Nine-Month report, additional current year expenditure savings and revenue
surpluses were identified, and the fund balance available for appropriation increased to $370.9 million.

              Exhibit 1-2. Buildup of FY 2019-20 Fund Balance Appropriated in the Budget

                   Projected in January 2020 Five Year Financial Plan      $    331.6
                     Mid-Year Shortfall at May 2020 Nine-Month                 (246.2)
                     Mayor's Mid-Year Rebalancing Plan                         246.2
                   Additional Fund Balance Projected Post 9-Month               39.3
                   Total Use of Fund Balance                                $ 370.9

2. Use of Reserves
As shown in Exhibit 1-3, the Mayor’s proposed budget uses of $156.5 million in FY 2020-21 and $331.6
million in FY 2021-22 from reserves. See Appendix 2 for more details.

                  Exhibit 1-3. General Fund Use of Prior Year Reserves ($ millions)
                                                         FY 2020-21 FY 2021-22
                                                           Proposed     Proposed
                                                            Budget       Budget
                 Budget Stabilization Reserve            $       42.0 $        125.3
                 Rainy Day Reserve                              114.5           57.3
                 Business Tax Stabilization Reserve               -            149.0
                 Total Use of Prior Year Reserves         $    156.5 $       331.6

3. Property Tax
The FY 2020-21 General Fund share of property tax revenue is budgeted at $2,019.6 million,
which is $63.6 million (3.3 percent) more than the FY 2019-20 budget. The FY 2021-22 General
Fund share of property tax revenue is budgeted at $1,976.9 million, which is $42.7 million (2.1
percent) lower than the proposed FY 2020-21 budget. The largest driver of these year-to-year
variances is related to excess Educational Revenue Augmentation Fund (ERAF) assumptions.
Excess ERAF is budgeted at $187.0 million in FY 2020-21, which is $2.0 million (1.1 percent) more
than FY 2019-20 budget, and $143.0 million in FY 2021-22, which is $44 million (23.5 percent)
less than the FY 2020-21 proposed budget

Changes in property tax revenues lag other recessionary revenue losses due to statutory
deadlines that key off the annual property lien date of January 1st. FY 2020-21 revenues are
largely based on values as of the January 1, 2020 lien date. Locally assessed secured property
roll growth as of that date is 7.7% over the FY 2019-20 lien date of January 1, 2019. While
9 | FY 2020-21 and FY 2021-22 Revenue Letter

taxable values grew substantially between those dates, the FY 2020-21 budget also contains
precautions for sharp increases in unpaid property taxes (especially unsecured business
property) and assessment appeals from hotels, retail, entertainment, and multi-unit apartment
properties.

The FY 2021-22 locally assessed secured property roll growth budget assumption is almost flat
at 0.2%. Hotel, retail, and office assessed values are assumed reduced by $8.5 billion, reflecting
declines of 20%, 20%, and 7%, respectively. A 20% reduction in unsecured business property tax
assessments is included in the projection, reflecting the possibility of business closures prior to
the January 1, 2021 lien date.

4. Business Tax
FY 2020-21 business tax revenue is budgeted at $831.4 million, which is $219.2 million (20.9
percent) less than what was budgeted in FY 2019-20. FY 2021-22 business tax revenue is
budgeted at $1,030.9 million, which is $199.5 million (24.0 percent) higher than the proposed FY
2020-21 budget. Business tax revenue is comprised of payroll tax, business registration fee,
administrative office tax, and gross receipts tax.

Revenues from business tax and registration fees follow economic conditions in the City,
primarily employment and wage growth. The COVID-19 emergency has significantly affected
the business tax revenue base. The unemployment rate in the City rose to 12.6% in April and
remains at 12.5% in June, the most recent data available. At the end of March, weekly initial
unemployment claims peaked at about 27,000. Though weekly initial claims fell in the following
weeks, since early May, initial claims have been around 5,000 weekly, more than five times
higher than the average number of initial claims in the two months before the March 17 shelter-
in-place order. Since March, thousands of businesses have closed temporarily, some
permanently.

The budget assumes underlying economic growth of -5% in tax year 2020 and 6% in tax year
2021, reflecting a quick recovery of employment lost to public health mandates, and that $37.2
million in business registration taxes budgeted in FY 2019-20 but deferred to FY 2020-21 are
paid in FY 2020-21. The assumption of payroll tax revenue generated by IPOs has been reduced
from $20.0 million to zero in FY 2020-21. Loss of revenue from potential penalty reform
legislation (estimated between $0.3M to $5.9M) is not included, and a measure on the
November 2020 ballot to restructure businesses taxes is assumed to generate $4.0 million of
business tax in FY 2020-21 and $23.0 million in FY 2021-22 as intended.

Additionally, the sudden and sharp increase in telecommuting creates revenue risk.
Approximately half of workers in major tax-paying sectors such as Professional Services,
Financial Services, and Information live outside of San Francisco. Extended periods of working-
at-home during the emergency may affect how much of a business’s payroll expense and gross
receipts is apportionable to San Francisco. Some of the City’s largest private employers have
instructed their employees to telecommute whenever possible, as evidenced by BART ridership
declining almost 90% from its pre-COVID-19 baseline ridership. Businesses owe payroll tax only
on their employees physically working within the City. For certain categories of businesses, the
gross receipts tax is also dependent on their San Francisco payroll. Thus, the sharp rise in
telecommuting will result in reduced business taxes. Although some San Francisco residents
who previously commuted out of the City are now telecommuting from within the City, many of
10 | FY 2020-21 and FY 2021-22 Revenue Letter

these residents work for employers who do not have a nexus in the City, and thus are not
subject to business taxes.

In the medium- to long-term, permanent relocations out of the San Francisco area could have a
larger impact on the City’s tax base. The budget assumes that in calendar year 2020, 50% of
workers in the Professional Services, Financial Services, and Information sectors who live outside
of San Francisco now work from home instead of commuting into the City, and that in calendar
year 2021, 25% telecommute. In FY 2020-21, these assumptions about telecommuting reduce
payroll tax revenue by 10.2% and gross receipts tax revenue by 7.7%. In FY 2021-22, these
assumptions reduce payroll tax and gross receipts tax revenues by 2.9% and 2.2%, respectively.

Exhibit 1-4 shows labor force and employment levels from 2011 through June 2020. In April,
during the most restrictive phase of the shelter-in-place order, employment fell to a level not
seen since the end of 2012. While employment has begun to rebound since May, it remains well
below the long-term trajectory.

  Exhibit 1-4. San Francisco Employment and Labor Force from January 2011 through June 2020

5. Sales Tax
Local sales tax is budgeted at $183.7 million in FY 2020-21, which is $20.4 million (10.0 percent) less than the
FY 2019-20 budget and a $13.3 million (7.8 percent) increase from FY 2019-20 as projected in the Nine
Month Report. FY 2021-22 local sales tax is budgeted at $185.3 million, which is $1.6 million (0.9 percent)
higher than the proposed FY 2020-21 budget. The decline in FY 2020-21 is due to anticipated losses at
restaurants, hotels, and non-essential retail because of the COVID-19 pandemic. Many San Francisco
businesses are closed or operating at significantly reduced capacity, and consumers are spending less in
certain categories given fewer opportunities and job loss or insecurity. To support small businesses, the
State allowed eligible businesses to defer sales and use tax payments over a period of 12 months. The
expiration of the deferral program contributes to slower estimated growth in FY 2021-22.
11 | FY 2020-21 and FY 2021-22 Revenue Letter

         Exhibit 1-5. Actual and Projected Change in Sales Tax Revenues for San Francisco,
                                      FY 2005-06 to FY 2021-22

6. Hotel Tax
The FY 2020-21 General Fund share of hotel tax revenue is budgeted at $126.2 million, which is $262.9
million (67.6 percent) less than what was budgeted in FY 2019-20. FY 2021-22 revenue is budgeted at
$233.0 million, an increase of $106.7 million (84.5 percent) from the proposed FY 2020-21 budget.

Total hotel tax revenue across all funds is budgeted at $156.7 million in FY 2020-21, $270.4 million (63.3
percent) less than budgeted in FY 2019-20 and a $111.8 million (41.7 percent) decrease from projected FY
2019-20 levels. FY 2021-22 hotel tax revenue is budgeted at $266.0 million across all funds, $109.3 million
(70.0 percent) more than budgeted in FY 2020-21. The difference between total and General Fund hotel tax
is due to funding requirements in November 2018 Proposition E, which caps changes in arts and culture
allocations of hotel taxes at 10% from the prior year.

The significant decline in FY 2020-21 is due to the far-reaching impact of the pandemic on San
Francisco’s travel and hospitality industries. San Francisco’s hotels are, on average, in the
higher-priced tiers and rely on business travelers and tourists who arrive by air. Because of the
COVID-19 pandemic, air travel is perceived as highly risky, and higher tier hotels are expected to
be the slowest class of hotels to recover in this economic climate. Large gatherings and
conferences, which normally drive up rates through compression pricing, remain prohibited in
the City. As of July, approximately 40% of San Francisco hotels remained closed, and occupancy
rates for those that were open averaged 34.1%. Adjusted for room supply, the occupancy rate
was 19.3%, an improvement from June’s 16.0%, but still a dramatic reduction from July 2019
occupancy of 84.9%. The projected recovery of hotel tax revenue in FY 2021-22 is largely based
on the assumption that an effective vaccine and or treatment allow large in person gatherings.
12 | FY 2020-21 and FY 2021-22 Revenue Letter

Revenue per Available Room (RevPAR), a measurement of hotel tax revenue growth, is a function of
changes in occupancy and average daily room rates (ADR). Exhibit 1-6 shows a recent history of RevPAR
levels. Despite some slowdown in the growth in the hospitality industry, the year-over-year change of
RevPAR has generally grown from FY 2011-12 to FY 2018-19. During the first seven months of FY 2019-20
RevPAR grew by 2.8% on average over the same period prior year. As airlines began suspending flights
to and from China in February, RevPAR decreased 10.9%. The decline sharpened with the shelter in
place order in March, and RevPAR in the City reached its record low of $15.89 in April, a 92.7% decrease
from the same month prior year. Since then, as the City has slowly eased some restrictions, RevPAR has
also increased slightly to $30.65 in June, still an 86.7% decrease from the same month in 2019. RevPAR
is not expected to recover to pre-pandemic levels until FY 2023-24.

            Exhibit 1-6. Average Annual Change in Revenue Per Available Room (RevPAR)
                                      FY 2011-12 to FY 2021-22

        *Data from FY 2011-12 to FY 2017-18 are provided by CBRE, and data from FY 2018-19 to FY 2019-20 are provided by SF Travel.

7. Utility Users Tax
FY 2020-21 utility user tax revenue is budgeted at $81.1 million, which is $17.6 million (17.9
percent) less than what was budgeted in FY 2019-20 and $8.3 million (9.3 percent) less than
projected in the FY 2019-20 Nine Month Report. FY 2021-22 revenue is budgeted at $89.0
million, which is $7.9 million (9.7 percent) higher than the proposed FY 2020-21 budget. The
budget reflects lower commercial utility usage (primarily for gas and electric utilities), as
businesses operate at lower levels of service and require their office workers to telecommute
from home through part of FY 2020-21. Residential gas and electric consumption have
increased during the pandemic, however, they are exempt from taxation in San Francisco.
13 | FY 2020-21 and FY 2021-22 Revenue Letter

8. Parking Tax
Parking tax revenue is budgeted at $59.4 million in FY 2020-21, which is $23.7 million (28.5 percent) less
than what was budgeted in FY 2019-20, and $11.3 million (16.0 percent) less than the Nine Month Report
projection. FY 2021-22 revenue is budgeted at $84.6 million, which is $25.2 million (42.5 percent) higher
than the proposed FY 2021-22 budget. Historically, parking tax revenues have correlated with business
activity and employment, although ride-sharing has disrupted that pattern in recent years. With the
COVID-19 pandemic, the City expects lower levels of business activity to depress parking tax revenues.
Parking tax revenues are deposited into the General Fund, from which an amount equivalent to 80 percent
is transferred to the Municipal Transportation Agency for public transit as mandated by Charter Section
16.110.

9. Real Property Transfer Tax
Real property transfer tax (RPTT) revenue is budgeted at $138.0 million in FY 2020-21, which is $158.1 million
(53.4 percent) less than the FY 2019-20 budget and a reduction of $78.0 million (36.1 percent) from the FY
2019-20 Nine Month report projection. In FY 2021-22, RPTT revenue is budgeted at $253.4 million, which is
$115.4 million (83.6 percent) more than the FY 2021-22 budget. The budget assumes that market
uncertainty will result in fewer transfers of commercial properties in FY 2020-21, but the City will return
to its long-term average in the following fiscal year. Considering the highly volatile nature of this revenue
source, the Controller’s Office monitors collection rates throughout the fiscal year and provides regular
updates to the Mayor and the Board of Supervisors. The budget does not assume the transfer tax rate
increases from the November 2020 ballot measure.

Exhibit 1-7 shows revenue collections beginning in FY 2000-01. As the City’s most volatile revenue source,
collections can see large year-over-year changes that have exceeded 70% in some instances. The main
factors creating volatility are sales of high-value properties, availability of financing, and the relative
attractiveness of San Francisco real estate compared to global investment options, all of which track well
with economic cycles, as well as voter-approved rate changes, which occurred in 2008, 2010 and 2016.

                Exhibit 1-7. Historical Real Property Transfer Tax Revenue ($ millions),
                                     FY 2000-01 through FY 2020-21

Exhibit 1-8 shows historical RPTT revenue by transaction size after being adjusted to reflect rate changes
from Prop W (November 2016), Prop N (November 2010), and Prop N (November 2008), and demonstrates
14 | FY 2020-21 and FY 2021-22 Revenue Letter

how the volatility of RPTT is due mainly to the sales of high-value (largely commercial) properties over $25
million. In FY 2008-09, transactions above $25 million would have generated only $10.6 million under the
current rates compared to the peak in FY 2016-17, when these transactions generated $295.8 million. Since
the end of the recession in FY 2009-10, these large transactions made up on average 58.0 percent of total
revenue but only 0.6 percent of the transaction count. This means that revenue is determined by a small
handful of transactions. In the past two recessions, the taxes collected on large transactions fell
dramatically, as shown by the narrowing between the blue and gray lines in FY 2001-03 and FY 2008-09,
and as assumed in FY 2020-21.

        Exhibit 1-8. Real Property Transfer Tax Rate-Adjusted Revenue by Transaction Size,
                             FY 2000-21 through FY 2018-19 ($ millions)

Deposits to the Budget Stabilization Reserve are funded with a portion of volatile revenues, including 75
percent of RPTT revenue in excess of the prior five-year average adjusted for any rate increases during
the period. No deposits are expected during FY 2020-21 or FY 2021-22 as RPTT revenue is projected to
be below the prior five-year average. See Appendix 2 for more detail on the Budget Stabilization
Reserve.

10. Stadium Admissions Tax
FY 2020-21 stadium admissions tax revenue is budgeted at $2.5 million, $3.0 million (54.5 percent) less than
the FY 2019-20 budget and Nine Month report projection, due to the restrictions on mass gatherings
during the COVID-19 pandemic. In FY 2021-22, revenue is budgeted at $4.4 million, as the economy
recovers and large gatherings for major events resume.

11. Cannabis Tax
In November 2018, voters approved a new gross receipts tax (Proposition D) of 1% to 5% on marijuana
businesses and permits the City to tax businesses that do not have a physical presence in the city. The
excise tax on cannabis goes into effect January 2021. FY 2020-21 cannabis tax revenue is budgeted at
$4.3 million and FY2021-22 revenue is budgeted at $8.5 million.
15 | FY 2020-21 and FY 2021-22 Revenue Letter

12. Sugar Sweetened Beverage Tax
The City’s one cent per ounce tax on tax sugar sweetened beverages became effective January 1, 2018. It is
expected to generate $14.0 million in FY 2020-21 and FY 2021-22. Given the experience of other
jurisdictions that have enacted soda taxes, we expect this revenue to decline in future years as consumers
switch to beverages not subject to the tax.

13. Access Line Tax
FY 2020-21 access line tax revenue is budgeted at $48.9 million, which is equal to what was budgeted in
FY 2019-20 and $1.5 million (3.0 percent) less than projected in the FY 2019-20 Nine Month Report. FY
2021-22 revenue is budgeted at $52.0 million, or $3.1 million (6.3 percent) higher than the proposed FY
2020-21 budget. Budgets reflect proposed inflationary increases to the access line tax rate as described
in Business and Tax Regulations Code Section 784.

14. Interest & Investment Income
Interest and investment income for FY 2020-21 is budgeted at $23.3 million, a decrease of $53.1 million
(69.5 percent) from the FY 2019-20 budget and $26.1 million (52.8 percent) from the projection in the
Nine Month Report. FY 2021-22 revenue is budgeted at $16.4 million, $7.0 million (29.8 percent) less
than budgeted in FY 2020-21. This decrease is a result of the use reserves, declining revenue receipts,
increased emergency response costs and maintenance of low interest rates by the Federal Reserve.

15. Intergovernmental – Federal
Federal support in the General Fund is budgeted at $615.9 million for FY 2020-21, which represents
growth of $335.9 million (120.0 percent) from the FY 2019-20 budget and $347.9 million (129.8 percent)
from the projection in Nine Month Report. FY 2021-22 revenue is budgeted at $293.6 million, which is
$322.4 million (52.3 percent) less than the proposed FY 2020-21 budget. The FY 2020-21 increase is
driven by anticipated one-time Federal Emergency Management Agency (FEMA) reimbursements for
COVID-related expenditures ($236.4 million) and Federal Coronavirus Relief Fund ($82.1 million).

16. Intergovernmental – State – Public Safety Sales Tax
Public safety sales tax revenue is budgeted at $97.1 million in FY 2020-21, a decrease of $7.6 million (7.2
percent) from the FY 2019-20 budget and $6.5 million (7.2 percent) increase from the Nine Month
Report. FY 2021-22 revenue is budgeted at $103.6 million, which is $6.6 million (6.8 percent) more than
the proposed FY 2020-21 budget. The decrease in FY 2020-21 is mainly due to the anticipated impacts
the Shelter-in-Place orders have on taxable sales. Similar to local 1% sales tax revenues, sales tax
deferral programs for small business also contributed to the sharper decrease of these allocations of
state sales tax in FY 2020-21 and the increase in FY 2021-20.

17. Intergovernmental – State – 1991 Health & Welfare Realignment
In FY 2020-21, the General Fund share of 1991 realignment revenue is budgeted at $190.1 million, or $30.9
million (14.0 percent) less than the FY 2019-20 budget and $6.1 million (3.1 percent) less than the projection
in the Nine Month Report. The FY 2021-22 revenue is budgeted at $197.0 million, which is $6.9 million (3.6
percent) more than the proposed FY 2020-21 budget. The decrease in FY 2020-21 is the result of reductions
in state sales tax revenue, which is partially backfilled with one-time State General Fund support. The
General Fund share of realignment backfill from the Human Services and Behavioral Health subaccounts is
budgeted at $19.7 million in FY 2020-21.
16 | FY 2020-21 and FY 2021-22 Revenue Letter

18. Intergovernmental – State – Public Safety Realignment
Public Safety Realignment (AB 109), enacted in early 2011, transfers responsibility for supervising certain
kinds of felony offenders and state prison parolees from state prisons and parole agents to county jails and
probation officers. This revenue is budgeted at $36.1 million in FY 2020-21, a $6.0 million (14.2 percent)
decrease from the FY 2019-20 budget and $8.8 million (32.3 percent) more than FY 2019-20 as projected in
the Nine Month Report. The FY 2021-22 proposed budget assumes a $2.8 million (7.9 percent) decrease
from FY 2020-21. This reflects revenue assumptions in the Governor’s May 2020 Revised Budget. As with
1991 Health and Welfare Realignment, the funding gap is partially backfilled with one-time State General
Fund support. The General Fund share of realignment backfill from the Public Safety subaccount is
budgeted at $2.6 million in FY 2020-21.

19. Intergovernmental – State – Other
Other State funding is budgeted at $415.8 million in FY 2020-21, a decrease of $22.3 million (5.1 percent)
from the FY 2019-20 budget, or $34.7 million (7.7 percent) less than FY 2019-20 as projected in the Nine
Month Report. In FY 2021-22 other State funding is budgeted at $399.2 million, a decrease of $16.6 million
(4.0 percent) from FY 2020-21. The decrease in FY 2020-21 is attributable to a series of decreases including
$27.7 million in Short-Doyle Medi-Cal funds, and $11.9 million in in Child Welfare Services and Foster Care
Services funding, partially offset by the increase of $8.9 million in CalWORKs Maintenance of Effort (MOE)
funding, and $7.9 million in IHSS Public Authority funding. The decrease in FY 2021-22 is primarily due to
the wind down of the Whole Person Care pilot program with a decrease of $20.6 million, partially offset by
an increase of $4.0 million in CalWORKs MOE funding.

20. Other Revenues
The proposed budget assumes revenues from other sources of $25.3 million in FY 2020-21, a decrease
of $44.2 million (63.6 percent) from the FY 2019-20 budget. FY 2021-22 revenue from other sources is
budgeted at $24.3 million, a decrease of $0.9 million (3.7 percent). These changes are primarily related
to the loss of one-time revenues budgeted in FY 2019-20: a $13.1 million market rate parcel sale at the
Potrero HOPE SF site, which will support HOPE SF rehabilitation and a grant of $15.0 million for Animal
Care and Control capital projects. In addition, $20.0 million of loan repayments from the Housing Trust
Fund was shifted from the General Fund to the Housing Trust Fund in FY 2020-21.

21. Operating Transfers In
Transfers-in to the General Fund are budgeted to increase by $283.6 million (173.5 percent) in
FY 2020-21 compared to the FY 2019-19 original budget, then decrease by $264.6 million (59.2
percent) in FY 2021-22. This pattern is largely due to the assumption that a November 2020
ballot measure to reform business taxes passes, which would enable the City to repay General
Fund advances made in prior years to support the programs funded by two contested tax
measures, the Commercial Rent Tax (June 2018 Proposition C) and Homeless Gross Receipts Tax
(November 2018 Proposition C).
17 | FY 2020-21 and FY 2021-22 Revenue Letter

Appendix 2. General Fund Reserve Uses and Deposits
The Mayor’s proposed budget includes the use of $156.5 million from reserves in FY 2020-21 and $331.6
million in FY 20201-22 for a total of $488.1 million over the two budget years. The budget assumes the
maximum allowable withdrawal from the City’s two economic stabilization reserves – the Rainy Day
Reserve and the Budget Stabilization Reserve. The Mayor’s proposed budget also includes $247.0
million and $39.8 million in deposits to General Fund reserves during FY 2020-21 and FY 2021-22,
respectively. These appear to be prudent and reflect anticipated Memoranda of Understanding (MOU),
litigation, and general contingency reserve requirements.

                      Exhibit 2-1. Proposed General Fund Reserve Uses and Deposits ($ millions)
                                                           FY19-20                            FY 2020-21                                  FY 2021-22

                                                           Projected                                    Projected                                  Projected
                                                             Ending                                      Ending                                     Ending
                                                            Balance         Deposits      Withdrawals    Balance             Deposits Withdrawals   Balance        Note
General Reserve                                            $     76.4   $        -        $      -    $        76.4        $       0.9 $     -    $      77.3       1

Rainy Day Economic Stabilization City Reserve                   229.1              -              (114.5)          114.5           -            (57.3)     57.3     2
Budget Stabilization Reserve                                    292.6              -               (42.0)         250.6            -           (125.3)     125.3    3
        Subtotal Economic Stabilization Reserves           $   521.7    $         -       $      (156.5) $       365.2     $      -       $   (182.6) $   182.6
              Percent of General Fund Revenues                 10.0%                                              7.0%                                     3.5%

COVID Response and Economic Loss Reserve                   $   507.4              -                -             507.4            -             -         507.4     4
 Rainy Day One-Time Reserve                                      -                 -                -               -              -             -          -
 Budget Stabilization Reserve - One Time Reserve                  -                -                -               -              -             -          -
 Affordable Care Act Contingency Reserve                          -                -                -               -              -             -          -
 State and Federal Revenue Risk Reserve                           -                -                -               -              -             -          -
 Housing Authority Contingency Reserve                            -                -                -               -              -             -          -
 Fund Balance Draw Down Reserve                                   -                -                -               -              -             -          -
 Budget Savings Incentive Fund                                    -                -                -               -                                       -

Business Tax Stabilization Reserve                                -              208.0              -             208.0                        (149.0)     59.0     5
Public Health Management Reserve                                 81.5              -                -              81.5            -             -          81.5    6
Rainy Day Economic Stabilization SFUSD Reserve                   34.5              -                -              34.5            -             -         34.5     3
Recreation & Parks Savings Incentive Reserve                      0.8              -                -               0.8            -             -           0.8    7
                                                Subtotal   $   624.2    $       208.0     $        -        $    832.2     $      -       $   (149.0) $   683.2

Annual Operating Reserves
Litigation Reserve                                               -                 11.0             (11.0)          -              11.0          (11.0)     -        8
Reserve for Technical Adjustments                                -                  4.5              (4.5)          -               4.5           (4.5)     -       9
Salary and Benefits Reserve                                      -                23.5             (23.5)           -             23.5          (23.5)      -       10
                                     Total, All Reserves   $ 1,222.3    $       247.0     $      (195.5) $      1,273.8    $     39.8     $   (370.6) $   943.1

NOTES
1. General Reserve
The General Reserve, established in Administrative Code Section 10.60, is intended to address revenue
and expenditure issues not anticipated during budget development, and is typically used to fund
supplemental appropriations or to offset significant revenue losses following the adoption of the
budget.

Ordinarily, the policy requires the General Reserve to increase to 3.0 percent of General Fund revenue in
FY 2020-21, with unused General Reserve carried forward from the prior year into the new budget year.
However, in years when the City is eligible to withdraw from its economic stabilization reserves, the
required balance of the General Reserve is reset to 1.5 percent of General Fund revenue, growing to 3.0
percent of General Fund revenues in 0.25 percent annual increments. Thus, the Mayor’s proposed
18 | FY 2020-21 and FY 2021-22 Revenue Letter

budget makes no withdrawals or deposits to the General Reserve in FY 2020-21 and makes a small
deposit of $0.9 million in FY 2021-22.

2. Rainy Day Reserves
The Rainy Day Reserve is established in Charter Section 9.113.5 and is funded by excess revenue growth
in good years. During a recession, the maximum allowable withdrawal from the City’s Rainy Day
Economic Stabilization Reserve is 50 percent of the balance in each year. Rainy Day Reserve balances
are comprised of three separate reserves: City Rainy Day Economic Stabilization Reserve, SFUSD Rainy
Day Economic Stabilization Reserve, and the City’s Rainy Day One-Time Reserve.

The Mayor’s budget appropriates the maximum allowable withdrawals of the City’s Rainy Day Economic
Stabilization Reserve, $114.5 million in FY 2020-21 and $57.3 million in FY2021-22, resulting in a
projected ending balance of $57.3 million by the end of FY 2021-22.

No deposits or uses of SFUSD’s Rainy Day Economic Stabilization Reserve are budgeted in either year.
In FY 2019-20, the San Francisco Unified School District’s Board approved the withdrawal of $20.0
million from the Rainy Day School Reserve on May 26, 2020. This withdrawal is assumed in the $34.5
million FY19-20 ending balance shown in the table above.

In accordance with the administrative provisions of the Mayor’s proposed budget, the balance of the
City’s Rainy Day One-Time Reserve, along with several other reserves, will be consolidated into a single
COVID Response and Economic Loss Reserve in FY 2019-20.

3. Budget Stabilization Reserve
Established by Administrative Code Section 10.60(c), the Budget Stabilization Reserve augments the
Rainy Day Reserve. These two reserves are available to support the City’s budget in years when
revenues decline. The Budget Stabilization Reserve is funded by 75 percent of three volatile sources:
real property transfer tax revenue, ending unassigned fund balance, and certain asset sales. No deposit
is budgeted to this reserve in either budget year.

During a recession, the maximum allowable withdrawal from the combined balance of City’s Rainy Day
Economic Stabilization Reserve and the Budget Stabilization Reserve is 30% in the first year and 50% in
the second year. The Mayor’s budget appropriates the maximum allowable withdrawals of the Budget
Stabilization Reserve, $42.0 million in FY 2020-21 and $125.3 million in FY 2021-22, resulting in a
projected ending balance of $125.3 million by the end of FY 2021-22.

4. COVID Response and Economic Loss Reserve
In accordance with the administrative provisions of the Mayor’s proposed budget, the balance of the
several reserves will be consolidated into a single COVID Response and Economic Loss Reserve in FY
2019-20, as shown below.
19 | FY 2020-21 and FY 2021-22 Revenue Letter

          Exhibit 2.2. Proposed COVID Response and Economic Loss Reserve ($ millions)

                                                              Nine-Month        Revenue Letter
                                                                 (May 2020)         (Aug. 2020)
       COVID Response and Economic Loss Reserve              $            -     $           507.4
       Rainy Day One-Time Reserve                                        45.5                 -
       Budget Stabilization Reserve - One Time Reserve                   66.9                 -
       Affordable Care Act Contingency Reserve                           50.0                 -
       State and Federal Revenue Risk Reserve                            40.0                 -
       Housing Authority Contingency Reserve                              5.0                 -
       Fund Balance Draw Down Reserve                                   213.0                 -
       Budget Savings Incentive Fund                                     87.0                 -
                                                   Total         $     507.4        $      507.4

5. Business Tax Stabilization Reserve
The Mayor’s proposed budget assumes that voters approve a November 2020 ballot measure to
modify the City’s business taxes, which would enable the City to access $302.8 million in FY 2020-21 and
$28.0 million in FY 2021-22 of revenues collected from the Commercial Rent Tax (June 2018 Proposition
C) and Homeless Gross Receipts Tax (November 2018 Proposition C) currently subject to refund due to
litigation. The Business Tax Stabilization Reserve was created to equalize the benefit of the advance
repayments assumed in the budget years over future fiscal years. The budget includes a $208.0 million
deposit in FY 2020-21 and a $149.0 million use in FY 2021-22.

6. Public Health Revenue Management Reserve
The Public Health Management Reserve is authorized under Section 12.6 of the administrative
provisions of the Annual Appropriation Ordinance, authorizing the Controller to defer surplus transfer
payments, indigent health revenues, and Realignment funding to offset future reductions of audit
adjustments associated with the Affordable Care Act and funding allocations for indigent health
services. This provision was adopted by the Board of Supervisors to smooth volatile state and federal
revenues that can lead to large variances between budgeted and actual amounts due to unpredictable
timing of payments, major changes in projected allocations, and delays in final audit settlements. The FY
2019-20 ending balance of the reserve is projected to be $81.5 million, as reported in the Nine Month
Report. There are no anticipated deposits or withdrawals from this reserve.

7. Recreation & Park Reserves
The Recreation and Park Savings Incentive Reserve is established by Charter Section 16.107(c) and prior
to Proposition B, passed by the voters on June 7, 2016, was funded by the retention of year-end net
expenditure savings and revenue surplus from the Recreation and Park Department. Proposition B
eliminated the ability to retain expenditure savings while preserving deposits from surplus revenue. Any
withdrawals from the reserve must go towards one-time expenditures. No deposits or withdrawals are
included in the Mayor’s proposed budget.

8. Litigation Reserve
The Mayor’s proposed budget includes $11.0 million for the litigation reserve in both FY 2020-21 and FY
2021-22. The reserve provides funding for judgments and claims paid out during the budget period
based on historical experience and consistent with the level adopted in the Five Year Financial Plan. The
20 | FY 2020-21 and FY 2021-22 Revenue Letter

City also maintains a separate reserve funded from prior year appropriations for large cases pending
against the City.

9. Reserve for Technical Adjustments
Reserves of $4.5 million in FY 2020-21 and FY 2021-22 in the proposed budget allow for technical
adjustments during the budget review process. The Mayor’s Office will inform the Budget and Finance
Committee prior to the final Committee vote on the budget as to the amount required for technical
adjustments up to that point and any balance that may be available for other uses.

10. Salary & Benefits Reserve
The Mayor’s proposed budget provides $23.5 million in FY 2020-21 and 2021-22 to cover costs related
to adopted MOUs with labor organizations.
21 | FY 2020-21 and FY 2021-22 Revenue Letter

Appendix 3. One-time Sources and Nonrecurring Revenue Policy
The use of one-time or nonrecurring sources to support ongoing operations creates a future budget
shortfall, requiring expenditures to be reduced or replacement resources identified. In December 2011,
the Board approved a Nonrecurring Revenue Policy, codified in Administrative Code Section 10.61,
which requires selected nonrecurring revenues to be used only for identified nonrecurring expenditures.
The Controller is required to certify compliance with this policy. The selected revenues include:
    • General Fund prior year-end unassigned fund balance, before reserve deposits, above the prior
          five-year average;
    • The General Fund share of revenues from prepayments provided under long-term leases,
          concessions, or contracts after accounting for any Charter-mandated revenue transfers, set-
          asides, or deposits to reserves;
    • Otherwise unrestricted revenues from legal judgments and settlements; and
    • Otherwise unrestricted revenues from the sale of land or other fixed assets.

Controller’s Certification
General Fund prior year-end unassigned fund balance is budgeted at $361.2 million for FY 2020-21 and
$9.8 million for FY 2021-22. These amounts fall below the prior five-year average of year-end fund
balances of $548.5 million. Thus, for the purposes of the non-recurring revenue policy, the use of fund
balance is not considered a one-time source. The proposed budget also uses $171.8 million in FY 2020-
21 and $167.3 million in FY 2021-22 of prior year reserves. Additionally, the budget appropriates $330.8
million of transfers-in related to the repayment of General Fund advances for June and November 2018
Prop C eligible purposes, assuming passage of a November 2020 ballot measure reforming business
tax. Of the $330.8 million of transfers, $272.8 million are one-time in nature. To equalize the benefit of
the repayment over time, a “Business Tax Stabilization Reserve” was created. As shown in Exhibit 3-1,
the budget contains $552.9 million of budgeted nonrecurring sources but only $341.7 million
nonrecurring expenditures. Therefore, the Controller’s Office cannot certify compliance with the policy.

                 Exhibit 3.1. General Fund Nonrecurring Sources & Uses ($ millions)

                                                                        FY 2020-21    FY 2021-22
                   One-Time Sources                                     Proposed      Proposed          Total
                   Prior Year Reserves
                     Rainy Day Reserve                                        114.5          57.3          171.8
                     Budget Stabilization Reserve                              42.0         125.3          167.3
                   November 2020 - Business Tax Prop C Release
                    Repayment of Jun & Nov 2018 Prop C Funds (One-Time)      272.8            -            272.8
                    Business Tax Stabilization Reserve                      (208.0)         149.0          (59.0)
                   Total One-Time Sources                               $   221.3 $        331.6    $     552.9

                   One-Time Uses
                   Capital Plannning GF Recommended Funding            $     47.0 $          46.3 $        93.3
                   Housing and Shelters                                      24.2             -            24.2
                   COIT Annual and Major IT projects                         22.9            17.4          40.3
                   DPH One time Uses                                          14.2            -             14.2
                   Other Capital                                              12.8           11.0          23.8
                   Equipment                                                   6.8             5.5          12.3
                   Nonprofit/Small Business                                    1.7             1.7           3.4
                   Covid General Fund Budget                                 93.0             -            93.0
                   Other                                                     30.5             6.7          37.2
                   Total One-Time Uses                                 $    253.1 $         88.6 $        341.7

                                                                                      Difference    $     (211.2)
22 | FY 2020-21 and FY 2021-22 Revenue Letter

Appendix 4. Baselines & Mandated Funding Requirements
Voter-approved levels of funding or staffing are summarized below in Exhibit 4-1.

                    Exhibit 4-1. Baselines & Mandated Funding Requirements ($ millions)

                                                                                         FY 2019-20         FY 2020-21       FY2021-22
                                                                                             Original          Proposed          Proposed
                                                                                             Budget             Budget            Budget      Note
  General Fund Aggregate Discretionary Revenue (ADR)                                     $      4,205.3 $         3,486.8 $         3,905.4
  Financial Baselines
  Municipal Transportation Agency (MTA)
   MTA - Municipal Railway Baseline: 6.686% ADR                                                   284.6             240.7             276.7
   MTA - Parking & Traffic Baseline: 2.507% ADR                                                   105.4              87.4              97.9
   MTA - Population Adjustment                                                                     56.3              55.4              57.6
   MTA - 80% Parking Tax In-Lieu                                                                   66.4              47.5              67.7
                                         Subtotal Municipal Transportation Agency $               512.7    $        431.0    $        499.8     1
  Library Preservation Fund
    Library - Baseline: 2.286% ADR                                                                 96.1              79.7              89.3     2
    Library - Property Tax: $0.025 per $100 Net Assessed Valuation (NAV)                           65.3              67.4              67.3     3
                                                                      Subtotal Library            161.4             147.1             156.6
  Children's Services
  Children's Services Baseline - Requirement: 4.830% ADR                                          203.1             168.4             188.6      4
    Children's Services Baseline - Eligible Items Budgeted                                        266.6             193.6             208.9
  Transitional Aged Youth Baseline - Requirement: 0.580% ADR                                       24.4              20.2              22.7     5
    Transitional Aged Youth Baseline - Eligible Items Budgeted                                     31.4              30.9              31.0
  Public Education Services Baseline: 0.290% ADR                                                    12.2              10.1             11.3     6
  Children and Youth Fund Property Tax Set-Aside: $0.0375-0.4 per $100 NAV                        104.5             107.8             107.7     3
  Public Education Enrichment Fund: 3.057% ADR                                                    128.6             106.6             119.4     7
     1/3 Annual Contribution to Preschool for All                                                  42.9              35.5              39.8
     2/3 Annual Contribution to SF Unified School District                                         85.7               71.1             79.6
                                                           Subtotal Childrens Services            543.2            449.0              478.3
  Recreation and Parks
  Open Space Property Tax Set-Aside: $0.025 per $100 NAV                                           65.3              67.4              67.3     3
  Recreation & Parks Baseline - Requirement                                                        76.2              76.2              79.2     8
    Recreation & Parks Baseline - Budgeted                                                         82.1              84.0              80.5
                                                       Subtotal Recreation and Parks              147.4             151.4             147.8
  Other Financial Baselines
  Housing Trust Fund Requirement                                                                   36.8              39.6              42.4     9
    Housing Trust Fund Budget                                                                       57.1             39.6              42.4
  Dignity Fund                                                                                     50.1              50.1              53.1    10
  Street Tree Maintenance Fund                                                                      21.7             18.0              20.1    11
  Municipal Symphony Baseline: $0.00125 per $100 NAV                                                3.5               3.8               3.7    12
  City Services Auditor: 0.2% of Citywide Budget                                                    20.1             22.9              21.4    13
                                                    Subtotal Other Financial Baselines            152.4              134.3            140.8
                                                         Total Financial Baselines $             1,517.1   $       1,312.7   $      1,423.3

  Recently Adopted Expenditure Requirements
  Our City, Our Home Baseline Requirement (Nov 2018 Prop C)                                       215.0             215.0             215.0    14
    Our City, Our Home Budget, Estimated                                                          340.0             266.8             279.8
  Early Care and Education Baseline Requirement (June 2018 Prop C)                                  93.1             79.7              86.5    15
    Early Care and Education Budget                                                                97.7              90.8              98.0
  Staffing and Service-Driven Baselines
  Police Minimum Staffing                                                                                  Likely Not Met                      16
23 | FY 2020-21 and FY 2021-22 Revenue Letter

NOTES
1. Municipal Transportation Agency (MTA) Baselines
Charter section 8A.105 established a Municipal Transportation Fund to provide a predictable, stable and
adequate level of funding for the MTA. Consistent with the Charter, in FY 2000-01 a base amount of
funding was established. Charter subsection (c) (1) requires the Controller’s Office to adjust the base
amount from year to year by the percent increase or decrease in General Fund Aggregate Discretionary
Revenues (ADR). This baseline is required to be adjusted for significant service increases. Beginning in
FY 2020-21, the MTA baseline will increase due to operating costs required in advance of the opening
of the Central Subway, which is expected to fully come online in FY 2021-22.

Beginning in FY 2002-03, this Charter section also established a minimum level of funding (required
baseline) for the Parking and Traffic Commission based upon FY 2001-02 appropriations. Proposition B,
passed by the voters in November 2014, requires that in addition to adjusting annually for the change in
ADR, these baseline amounts be increased for 10 years of population growth in the City in FY 2015-16
and annual population growth thereafter. Finally, 80 percent of parking tax revenue is allocated to the
MTA. In total, the Mayor’s proposed budget includes funding for theses MTA baselines at the required
levels of $431.0 million in FY 2020-21 and $499.8 million in FY 2021-22.

2. Library Baseline
Charter Section 16.109 established a Library Preservation Fund to provide library services and to
construct, maintain, and operate library facilities. Consistent with the Charter, in FY 2006-07 a base
amount of funding was established, which is adjusted annually by the percent increase or decrease in
ADR. Based on revenue in the Mayor’s proposed budget, the Library Baseline requirements of $79.7
million in FY 2020-21 and $89.3 million in FY 2021-22 are met.

3. Property Tax-Related Set-Asides
Charter Sections 16.108, 16.109, and 16.107 mandate property tax-related set-asides for the Children and
Youth Fund, the Library Preservation Fund, and the Open Space Fund, respectively. The Children and
Youth Fund receives an allocation of $0.0400 on each $100 valuation of taxable property. The Library
Preservation Fund and the Open Space Fund receive allocations of $0.025 for each $100 valuation of
taxable property. The Mayor’s proposed budget includes required funding of $107.8 million in FY 2020-
21 and $107.7 million in FY 2021-22 for the Children and Youth Fund, and $67.4 million and $67.3 million
in FY 2020-21 and FY 2021-22, respectively, for both the Library Preservation Fund and Open Space
Fund.

4. Children’s Baseline
Charter Section 16.108 established a Children and Youth Services baseline. Consistent with the Charter,
in FY 2000-01 a base amount of funding was established, which is adjusted annually by the percent
increase or decrease in ADR. Proposition C, approved by voters in November 2014, amended the
Charter to exclude medical health services as an eligible service. As a result, and as part of establishing
the Disconnected Transitional-Aged Youth Baseline, the Controller reviewed City appropriations
included in the fund and excluded medical health services and other expenditures now mandated by
state law. The Controller then recalculated City appropriations as a percentage of ADR to arrive at an
adjusted baseline rate. The required Children’s baselines for FY 2020-21 and FY 2021-22 are $168.4
million and $188.6 million, respectively. The Mayor’s proposed budget includes Children’s Baseline
appropriations of $193.6 million and $208.9 million, which exceed the minimum requirement by $25.2
million in FY 2020-21 and $20.3 million in FY 2021-22.
24 | FY 2020-21 and FY 2021-22 Revenue Letter

5. Disconnected Transitional-Aged Youth Baseline
Proposition C, approved by voters in November 2014, amended Charter Section 16.108 to increase the
Children’s Baseline to include services for Disconnected Transitional-Aged Youth (TAY), known as the
TAY Baseline. The Charter requires that the TAY Baseline be added to the Children’s Baseline, however,
it is tracked separately for reporting purposes. The TAY Baseline amount was established in FY 2013-14
and like the Children’s Baseline is adjusted annually by the percent increase or decrease in ADR. The
required baselines for FY 2020-21 and FY 2021-22 are $20.2 million and $22.7 million, respectively. The
Mayor’s proposed budget includes TAY eligible baseline appropriations of $30.9 million and $31.0
million, which exceed the minimum requirement by $10.7 million in FY 2020-21 and $8.3 million in FY
2021-22.

6. Public Education Services Baseline
Charter Section 16.123-2 established a Public Education Enrichment Fund. Consistent with the Charter, in
FY 2001-02 a base amount of funding was established, which is adjusted annually by the percent
increase or decrease in ADR. The Mayor’s proposed budget includes the required $10.1 million in FY
2020-21 and $11.3 million in FY 2021-22 for this baseline.

7. Public Education Enrichment Fund Annual Contribution
In addition to the Public Education Services Baseline, Charter Section 16.123-2 requires the City to
support education initiatives with annual contributions equal to the City’s total contribution in the prior
year, adjusted for the change in ADR. The proposed budget includes $106.6 million and $119.4 million
for the Public Education Enrichment Fund Annual Contribution in FY 2020-21 and FY 2021-212,
respectively. One third of the contribution supports the Preschool for All program at the Office of Early
Childhood Education and two thirds of the contribution supports programming at the San Francisco
Unified School District.

8. Recreation & Parks Baseline
In June 2016, voters approved Proposition B, a Charter amendment which requires an annual
contribution from the General Fund to the Recreation and Parks Department that will increase by $3.0
million per year for the next ten fiscal years, and then be adjusted at the same rate as the percentage
increase or decrease in ADR. The City may suspend growth in baseline funding in years when the City
forecasts a budget deficit of $200 million or greater. Growth in the required spending level in FY 2020-
21 is suspended because of the forecasted budget deficit, resulting in required baselines for FY 2020-21
and FY 2021-22 of $76.2 million and $79.2 million, respectively. The Mayor’s proposed budget includes
General Fund appropriations of $84.0 million and $80.5 million, which exceed the minimum
requirement by $7.9 million in FY 2020-21 and $1.3 million in FY 2021-22.

9. Housing Trust Fund
In 2012, voters established the Housing Trust Fund. Charter section 16.110 requires an annual
contribution from the General Fund to the Housing Trust Fund of $20.0 million beginning in FY 2013-14
and increasing annually by $2.8 million. The required baselines for FY 2020-21 and FY 2021-22 are $39.6
million and $42.4 million, respectively, and the Mayor’s proposed budget includes funding at that level.

10. Dignity Fund
In November 2016, voters approved Proposition I, establishing the Dignity Fund to support
programming for seniors and adults with disabilities. Charter section 16.128-3 establishes a baseline
contribution from the General Fund to the Dignity Fund of $38.1 million beginning in FY 2016-17,
increasing by $6.0 million in FY 2017-18 and by $3.0 million per year from FY 2018-19 through FY 2026-
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